How do solar rebates work?
There are a multitude of incentives available for home solar. This guide will help you make sense of them.
Although the technology of solar photovoltaics has been around for a long time, it’s only been fairly recently that we’ve seen their widespread adoption in the residential market. Governments at all levels, in the United States and around the world, have been using incentives as a way to kick-start the industry to help fuel job growth and meet their renewable energy targets.
This has been widely successful, helping to drive down the current price of solar to less than 1% of what it was in 1977. Swanson’s Law is the observation that the cost of solar drops by half every time the industry doubles its shipped volume. With the huge markets of China and India racing to install more renewable energy, we can expect this volume to continue to increase and prices to drop for the foreseeable future.
As the price comes down, governments and other entities are also starting to pull back on rebates. The most significant of these, the federal solar tax credit, will be reduced over the next few years. For the prospective solar homeowner today, it’s important to be aware of all the rebates available so that you can make a smart financial decision. This article summarizes all of these types of rebates, from federal to local.
Federal Solar Tax Credit
The most important incentive for the solar homeowner is the federal Residential Energy Efficient Property Credit, also known as the solar Investment Tax Credit for the business community. It gives you a deduction on your federal taxes for the installation of energy-related improvements to your home, including solar electric, solar hot water, small wind, and geothermal heat pumps.
The credit is currently calculated as 26% of your total system costs, but that amount will step down over time. “Total system cost” means the cost of the hardware, which includes the solar panels themselves, the inverters needed to convert DC to AC power, the electrical work to wire it all together, and the racking to mount this hardware on your roof. It also includes the labor and fees charged by your contractor.
So, that means if the sticker price of your system is $15,000, the credit will bring your cost down to $11,100. That’s a pretty sweet deal.
After 2022, the rebate will begin to drop. The table below describes the current schedule:
|Date installation completed||Tax credit amount|
|up to 12/31/2022||26%|
|calendar year 2023||22%|
|after 2023||0% for residential solar, 10% for businesses|
How does the federal tax credit work?
You use the credit at tax time to reduce the amount of federal income tax you owe. This means that you have to pay the full price of the system upfront to your contractor, and then wait until tax time to use the credit to reduce your IRS bill. This is an important detail to keep in mind, and it may catch some people by surprise who expect to immediately get 30% off the sticker price.
(By the way, here’s a tip you can use to tide you over for the few months until you get your federal tax rebate: find a deal on a 0% APR credit card, which are offered as an introductory rate by many companies. Just be sure to pay off the card before the end of that introductory rate so that you don’t get slammed by very high interest rates, which can be more than 20%. Ouch.)
Because the upfront cost of a photovoltaic system runs into the thousands of dollars, the tax credit you earn from this could be very large, even more than what you owe in federal taxes. If that’s the case, don’t worry. You can roll over any unused credits to the next year. For example, if your credit is $5,000, but your tax bill is only $4,000, you can use $4,000 of your credit this year, and the remaining $1,000 next year. You must spend the credit within two years, however.
Can the credit be taken on a second home?
Yes you can, if that’s where you are mostly living that year. The IRS specifies that the credit is for your main home in the tax year. They define main home as:
Your main home is generally the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, or vacation, won’t change your main home.
Main home isn’t the same thing as primary home. For example, if you’re retired (congratulations!) and spend most of the year in your cottage, and then decided to install solar panels on that cottage, you can claim the credit because that’s where you lived that year.
Can I take advantage of the rebate in addition to state or local credits?
In all cases that we are aware of - yes. Taking the federal solar tax credit does not prevent you from also receiving rebates offered by your state, municipality, or utility.
Which are the relevant IRS forms?
Use Form 5696 for residential (home) solar.
Use Form 3468 for commercial solar.
It’s too bad that the credit steps down over time. Will it be renewed?
A renewal would require an act of Congress. It has been renewed before, most recently by the Bipartisan Budget Act of 2018. There is no certainty that they would do it again. Best to take advantage of it in the available timeframe, if you can.
Where can I learn more?
Read the instructions for the relevant IRS form (residential or business). It’s worthwhile reading because in addition to solar electric, other energy efficient technologies are included such as solar hot water and geothermal heat pumps.
Making sense of state and local rebates
After the federal tax credit, the other incentives available to the solar homeowner are at the state and local level. This is where it gets pretty complicated, because there are many different types of incentives that are implemented across the country, and they can come from state governments, local governments, individual utility companies, and non-governmental organizations.
Figuring out all of this on your own can be pretty tricky, so I’ve distilled the available rebates across the United States into the table below so that you can see at a quick glance whether you live in a state where you are likely to get a nice financial reward for going solar. Due to the immense number of programs spread across all the states, municipalities, utility companies, and other governmental organizations, listing the actual programs in this article isn’t feasible.
Fortunately, all you need to do is use the solar pricing calculator to find out the details of the rebate programs in your area. It will take into account any of the incentives for your local area (except for property tax exemptions) and include them in the calculated price and payback period.
Before we review the table, here’s some definitions for each of the rebate categories:
Income tax rebate means that the state offers an income tax credit for solar photovolatics. A state tax credit works much like the federal credit, in that the deduction isn’t taken off the sticker price of your solar system, but instead is claimed when your yearly tax time rolls around. And much like the federal program, a state tax credit can only reduce your income tax bill to zero, and any unused credit is wasted - although some states do allow you to roll over any unused credits to following years.
Other state rebate refers to statewide rebates offered by an organization other than the state tax agency. For example, the New York State Energy Research and Development Authority (NYSERDA) operates the NY-Sun program, which offers significant rebates to both homeowners and businesses going solar. NYSERDA is a public benefit corporation, and is separate from the NY Department of Taxation and Finance, which also offers a state tax rebate. (NY happens to be one of the best states for homeowners who want to go solar.) Other states that also have non-tax agency rebates are Maryland (from the Maryland Energy Administration), New Hampshire (NH Public Utilities Commission), Rhode Island (RI Renewable Energy Fund), and Vermont (Vermont Public Utility Commission).
If the local rebates column indicates yes for your state, it means that some local governments or utility companies in that state are offering an incentive. This may or may not be where you happen live, so check with your local municipality and utility company to see what programs are available. Our calculator lists these rebates as well, but due to the very large number of towns and utility companies in the United States, this incentive category is difficult to keep up-to-date. If you find that we’re missing information on a solar rebate in your local area, please let us know.
Solar Renewable Energy Credits (SREC) are a market-based approach used by some states that have a target for renewable energy they want to meet, also known as a Renewable Portfolio Standard. A SREC is a credit representing the production of 1,000 kilowatt hours (1 megawatt hour) of renewable energy. For example, if your solar home generates 5 megawatt hours of electricity in a year, you would receive 5 SRECs. You could then sell those credits on the open market to any entity that is trying to meet a renewable energy target. For example, a utility company with a preponderance of fossil fuel generation could purchase your SRECs to help meet their clean energy target. Because it’s an open market, the price of SRECs fluctations continuously, much like the stock market does.
We’ve only indicated yes in those states where the SREC market is viable enough for the credits to worthwhile to the solar homeowner. For example, in some states the SREC market is oversupplied, such as in North Carolina, which allows renewable energy producers from anywhere in the United States to register, making it virtually impossible for a North Carolinian solar homeowner to participate. In other cases, the market price for SRECs may be so low that it’s not really worth your time.
Renewable energy credits are definitely the most complicated way to implement a solar incentive, and prices for SRECs fluctate on a day-to-day basic, so I recommended visiting the SRECTrade website for up-to-date information.
If your state has a sales tax rebate, it means that solar is exempt from the state portion of your sales tax. Some muncipalities implement their own local sales tax, however, so even if your state offers tax relief, your town may not.
If a Property tax rebate mandate is indicated, it means that the state government has made solar photovoltaics exempt from increasing your property taxes. Suppose that you’ve added a $10,000 solar system to your house. This increases the value of your house, and at your next property tax assessment, your property tax would increase to reflect that added value unless your state or city offers an exemption for solar. This column only indicates where a state has mandated this rebate for all municipities. It’s always possible that your local town has independently created their own exemption. Check with your city tax office to find out.
Summary of solar rebates by state
This table is a summary of state and local rebates for solar photovoltaics. See the legend below for definitions.
- Income tax
- A state income tax rebate is available.
- Other state
- Indicates there is a non-income tax statewide rebate available.
- There may be local rebates available near you, either from your municipality or utility company.
- Solar Renewable Energy Credits are available in the state.
- Sales tax
- Indicates that there is a partial or complete state income tax rebate.
- Property tax mandate
- The state requires that local municipalities offer a property tax exemption for added value from solar panels.
|State||Income tax||Other state||Local||SREC||Sales tax||Property tax mandate|